European energy market to change if the UK leaves the EU

The Conservative party victory in the UK’s May 7 general election has removed one uncertainty for the energy sector, only to replace it with another.

The Labour party will not be able to push through its plans to freeze energy prices, but the Conservatives are committed to holding a referendum before the end of 2017 on the UK leaving the European Union, opening up a new threat to the current market framework.

The Conservatives hope to renegotiate the UK’s relationship with Europe, before holding a national vote on a ‘British exit’.

If the negotiations go well UK Prime Minister David Cameron plans to campaign for the UK to stay in.

Depending on the speed of negotiations, the vote could happen as early as May 2016 to coincide with local UK elections.

If the UK stays in Europe, as Scotland voted to stay in the United Kingdom in its September 2014 referendum, the market would continue as now.

The impact if the UK voted to leave Europe is less clear.

However, some past studies of the topic may give suggestions as to the potential changes ahead.

After a decision to pull out, the UK would still need to negotiate a new agreement with the EU to contain transitional arrangements as well as provide for the UK’s long-term future relations with the EU.

The UK could opt for continued membership of the European Free Trade Area (like Norway and Switzerland) and the European Economic Area (like Norway but not Switzerland).

The EFTA option establishes a free trade area, rather than a customs union like the EU.

The EEA means sharing in the EU single market and free movement of goods, services, people and capital, together with laws in areas such as employment, environmental policy and competition, without establishing customs union, common trade policy, or shared justice and home affairs.

Transparency Trend

In practice the UK would likely continue to be a part of Europe’s integrated gas and power markets through one mechanism or another, just as Norway is a key part of Europe’s gas system and Switzerland a key gas and power transit state.

The UK would likely agree rules to allow for the continued smooth functioning of international trade across power cables, such as the UK links with France and the Netherlands, and gas lines, such as the pipes to Belgium and the Netherlands.

Being a member of the EU is not compulsory for membership of the EU Emissions Trading Scheme. Europe has considered linking the EU ETS to foreign schemes including those of both Switzerland and, further afield, Australia, although Australia’s own position on carbon trading has since changed.

The House of Commons library published a report on “Leaving the EU” in July 2013 to inform members of parliament. It notes that a single market in energy has many potential benefits, and that the government (then, as now, Conservative-led) “is unlikely to want to reverse the trend for more transparency and a level playing field.”

The report argues that “given the multinational nature of energy markets and companies, even withdrawal from the EU would probably not affect the direction of travel.”

However, the report suggests that the UK could opt to drop some specific European measures. For example, Europe’s Industrial Emissions Directive imposes stricter emissions controls on power plants by 2023.

“Outside the EU, the government might choose to allow longer lifetimes” for some older plant, the report says.

Europe has also imposed on the UK a target to source 15% of its energy (electricity, heat and transport combined) from renewables by 2020, to fit within the EU’s overall target of 20% by 2020.

The library report says that “the driver for the focus on renewables in the UK up to now has been the EU targets, but it is difficult to say how much would change if those targets were removed as a result of leaving the EU.”

The UK would still have its own legally-binding climate change targets established by the UK Climate Change Act 2008, so the country would still need to reduce emissions, unless that act too were repealed, but there could be a reduced emphasis on using renewables as a means to do so.

Renewables Risk

Some commentators have argued the UK could cut emissions more cheaply by measures such as greater switching from coal to gas and nuclear, than by building the offshore wind currently planned.

The Institute of Economic Affairs think-tank last year awarded its “Brexit” (British EU exit) prize to a paper by UK diplomat Iain Mansfield.

Mansfield argued in the paper that in the event of an exit the binding renewable energy targets for 2020 should be repealed.

“Establishing the matter in statute reduces the ability to appropriately respond to the evolving energy needs and environmental pressures in the UK,” he said.

He also argued that the energy performance of buildings is “more appropriately the province of national legislation.”

Major UK energy companies are part of Europe-wide and global markets.

Only two of the UK’s “big six” utilities are UK-owned: Centrica and SSE. E.ON and RWE are German-based, EDF Energy is French and Scottish Power is part of Spain’s Iberdrola.

The two UK-owned companies have pointed to the importance of integrated, competitive markets.

“We believe that a competitive Europe is good for the UK,” Centrica told Platts this week.

The company’s CEO Iain Conn has previously told the Financial Times that “the UK needs to be fully inside, driving a competitive Europe, rather than outside, because at that point nobody will listen.”

SSE CEO Alistair Phillips-Davies said in a blog May 18 that he took “no view” at this stage on the EU referendum, but was “clear that the progressive integration of the GB energy market with other countries in Europe is in the best interests of efforts to deliver clean, affordable and secure supplies of energy.”

The other four companies did not immediately reply to requests for comment.

Of the UK’s two major oil and gas producers, BP declined to comment this week.

Shell said its CEO Ben van Beurden set out the company’s position last year when he said he was “in favor of the UK maintaining its long-established place at the heart of the European Union” as this “provides greater investment stability and certainty.”